For the first time, parties in a dispute before the American Arbitration Association (AAA) can opt for built-in appellate review of arbitral awards. But reception to the new AAA appellate rules, which became effective on Nov. 1, has been mixed among Texas litigators.

The AAA’s optional appellate rules can only be used when there is an agreement between the parties, and the rules only allow parties to appeal based on errors of law and clearly erroneous determinations of fact. The AAA appellate panel consists of former federal and state judges, as well as neutrals with appellate experience. The AAA anticipates the appellate panel can rule within three months.

While noting that arbitration originally was designed to provide parties with quick and efficient binding rulings without appellate delays, Eric Tuchmann, general counsel for the AAA, says the association decided to offer an appellate option for a couple of reasons.

The first was the U.S. Supreme Court’s 2008 ruling in Hall Street Associates v. Mattel. In the 6-3 decision the high court foreclosed parties’ ability to contract for expanded judicial review of arbitration decisions, outside of a very narrow set of circumstances allowed under the Federal Arbitration Act, Tuchmann said. Even though the AAA supported the majority decision in Hall Street, the association came up with the new appellate rules because clients asked for them, he said.

“The optional appellate rules were really drafted for the large case where a party believes that some appellate right is essential. …” Tuchmann explained.

“We think that it’s a relatively narrow range of cases that would be utilizing the appellate process,” Tuchmann said.

To Use or Not?

So far, Texas litigators are approaching the new appellate option with some trepidation.

“I think the AAA is being savvy because one of the primary objections that people have to arbitration is: You don’t get the right of appeal. The grounds for appeal are extremely limited. And it’s almost impossible to get an award vacated,” said Adam Schiffer, a partner in Houston’s Schiffer Odom Hicks & Johnson, who spends half his time litigating his clients’ cases before courts and the rest of the time in arbitration.

“I think what they’re trying to do is not to lose market share. I’m of the personal view that, in domestic disputes, litigation is the way to go,” Schiffer said. “But, if you’re a plaintiff and if you want a quick result, arbitration is a good way to go. But, as far as justice, litigation is a better way to go. It’s a good middle ground if you want your dispute before a private party and you want to preserve your appellate rights.”

Bill Katz, a partner in Dallas’ Thompson & Knight who is co-chair of his firm’s complex business litigation practice group, said he’s inclined to advise clients not to use the AAA appellate option.

“If you look at the way the rules work, it adds another layer of uncertainty,” Katz said, who spends a majority of his time representing clients in arbitration disputes.

Most of Katz’s clients who prefer arbitration want a certain amount of control in choosing the arbitrator to hear their disputes, Katz said. “And the appellate process doesn’t give you that control. You’re limited to the AAA panel of arbitrators. And sometimes clients want arbitrators with a special kind of experience.”

Charles Schwartz, who heads the Houston litigation practice group for Skadden, Arps, Slate, Meagher & Flom, said he’ll recommend clients use the appellate option, depending on the case.

“Obviously, you have certain aberrational results in arbitrations. And people are learning from those aberrational results. It’s sort of the way the law develops. You hear about horror stories in ligation, and now you’re hearing about horror stories in arbitration,” Schwartz said. “And just knowing that an arbitrator’s decision can be reviewed will have a good effect.”